Counting what counts

This post appeared in Dutch on the Oikocredit website.

“How are you?” It is a question we hear on a daily basis. The answer seems straightforward: “Good.” However, it is arguably one of the most complex questions someone can ask, as it requires the evaluation of every single facet of our lives: job, relationships, health, and so forth.

Many economists and policy makers are interested in quantitative measures of wellbeing. The concept of wellbeing is meant to represent the quality of life of an individual or group. In a way, it puts a number on the answer to “how are you?” And just like this question is difficult to answer, the measurement of wellbeing is difficult to do.

Beyond GDP

For a long time, economists have used monetary measures to proxy wellbeing, such as the gross domestic product (GDP). They are – at least in theory - relatively easy to calculate as the components can be counted and added up. But, as a sign in Einstein’s office at Princeton read: “Not everything that counts can be counted, and not everything that can be counted counts.”

Wellbeing is influenced by factors that are difficult or impossible to count, such as the quality of relationships or the way you feel when you wake up in the morning. Economists are therefore increasingly interested in alternative measures of wellbeing, such as happiness.

It’s all about the money?

As part of my PhD research I travelled through Bolivia and interviewed the local population about their happiness. One of my main research questions was how happiness is associated with other aspects of life. For example, does money make you happy? Based on these data I collected, I can answer sí wholeheartedly. Richer people were happier and many other studies have come to the same conclusion.

However, already in the 1970s, Richard Easterlin found that the relationship between income and happiness is more complicated than it seems. He found that richer people within a country were indeed happier, but that richer countries are not necessarily happier on average. This “Easterlin paradox” can be explained by the fact that individuals tend to compare themselves to others. In that sense, it is not the absolute income that matters, but the relative income. For example, you might be content with your own car until your neighbour buys a new, slightly bigger, one.

Does it count?

Why is this kind of knowledge important? First of all, a wider view of wellbeing can help to set priorities for policy. If we assume that relative income is more important than absolute income, we should aim to reduce income inequality. After all, larger income differences would then cause larger aggregate unhappiness.

Alternative measures of wellbeing can also help us to see things we would otherwise miss. A nice example is Egypt. In the run-up to the Arab Spring, the GDP per capita was steadily growing; the country was doing well according to the traditional measures. However, the percentage of happy people in 2010 was only half of what it was five years earlier. The discontent would come to an explosion at the Tahrir Square at the beginning of 2011.

It would be good if economists and policy makers looked beyond the traditional approaches to measure wellbeing. There are many more possibilities to count what really counts.

Read more?

• The World Happiness Reports of 2012 and 2013 offer a good introduction to anyone who is interested in happiness research.
• An article by Betsy Stevenson and Justin Wolfers, who investigate the Easterlin Paradox using new data. According to their results richer countries are indeed happier than their poorer counterparts, which contrasts with Easterlin’s findings.